Taxpayers who filed an extension to file their 2011 tax returns in April 2012 should file their returns by October 15 2012 to avoid the following penalties:
Failure to file return / Late filing penalty (Section 6651(a)(1) )
5% of unpaid balance for each month or part of a month the return is late. Maximum 25%. If the return is more than 60 days late, the minimum penalty is the lesser of $135 or tax due. There is no penalty if the return shows a refund. If the taxpayer is subject to failure to file and failure to pay penalties for the same month, the failure to file penalty is reduced by the failure to pay penalty.
Failure to pay tax / Late payment penalty (Section 6651(a)(2) )
0.5% of unpaid balance for each month or part of a month there is an unpaid balance. Maximum 25%. The penalty is half the usual rate for any months an installment agreement is in effect.
Fraudulent failure to file tax return ( Section 6651(f) )
Section 6651(a)(1) penalty is replaced with 15% of tax per month not to exceed 75% of tax.
Underpayment of estimated tax by individuals (Section 6654)
Interest at federal rate for underpayments applied to the underpaid amount for the number of days late. (Changes by quarter. 4-6% on average)
Willful failure to pay tax or file return (Section 7203)
Misdemeanor—up to $25,000 fine, one year in prison or both; $100,000 for corporations.
Remember that code section 6664(c) and (d) allow for no penalty to be imposed if the transaction lacks economic substance.
TaxPlannerCPA.com urges those who still owe taxes and must file to examine several available options. Taking advantage of the IRS tax extension allows more time to file, but not to pay any taxes due, so interest is accruing on taxes not paid by the April filing deadline (or June 15 deadline for overseas taxpayers). It’s always better to file your return and pay what you can, and show the IRS your intention to pay the rest of your tax liability by making payment arrangements. Taxpayers can e-file their returns through this final deadline.
There a number of options available to taxpayers to pay their tax liability. Taxpayers that can pay their tax liability in full can do so by debit or credit card, electronic funds transfer or check or money order. Or taxpayers can ask the IRS for permission to make monthly installment payments by completing Form 9465, Installment Agreement Request, and attach it to the tax return. The IRS will approve or deny the request by sending out a written response. If the request is approved, the IRS will charge a fee that will be deducted from the first installment payment and will send instructions on how to make the monthly installment payments. Another available option to ensure timely payments is to have the funds directly debited from a bank account.
Some financially distressed taxpayers may quality for an Offer in Compromise. Under the OIC agreement, the IRS may agree to settle the taxpayer’s liability for less than the full amount of taxes owed. The IRS is not likely to approve an OIC if there’s evidence that the taxpayer could pay the full amount through the installment plan or another method. The IRS measures the “reasonable collection potential” (RCP) for payback by considering the value of the taxpayer’s assets including property, cars, other accounts and anticipated future income. A taxpayer can request consideration for an OIC by filling out Form 656, Offer in Compromise, or Form 656L, Offer in Compromise (Doubt as to Liability) and submit it with their tax forms.
Remember the mailbox rule:
• A return or payment postmarked on or before a due date is considered filed or paid on the due date even if received by the IRS after the due date. (IRC §7502)
• An original return claiming a refund or credit that is postmarked before the end of the three-year limitation period is considered filed on the postmark date. (Reg. §301.7502-1)
• An amended return is also considered filed on the postmarkdate [Reg. §301.6402-3(a)(5)]. This applies only to amended returns that include a claim for refund. (CCA 201052003)
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Tax Planner CPA is a team of Certified Public Accountants and Enrolled Agents with over 25 years of experience focusing exclusively on the taxation of US taxpayers living abroad. Our services include helping taxpayers with their tax extensions. We maintain this knowledgebase where all articles are written by CPA’s, Enrolled Agents, or attorneys (Except for those on Expat Life – which have proven to be a popular read with fun facts on different cities!). Our main objective is to educate Americans abroad on their tax responsibilities, so that they can look for planning alternatives on time. They are also designed to help taxpayers looking to self prepare, providing specific tips and pitfalls to avoid. If you found this article helpful, you’ll likely benefit from our future ones as well – so we encourage you to avoid pitfalls and join our mailing list:
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